Are you only making the minimum monthly payments toward your debt? Let’s look at a couple of the Myths of the Minimum Payment that might motivate you to do at least a little bit more! We’ll discuss in the comments below.
Myth #1– You will never pay off your debt if you pay just the minimum monthly payment.
This used to be true. Credit card companies used to charge such low minimum monthly payments that the payment wouldn’t even cover the interest. None of the payment went to principal, so the credit card debt would continue to grow, even if nothing else was charged to the card. It’s called negative amortization and it was bad news for consumers before 2003.
In 2003 legislation was passed requiring the minimum payment to cover fees and interest and allow some of the payment to go toward principal. If you have credit card debt, you will eventually pay of your debt off by making the minimum payment, but it will take years longer and cost you much more in interest.
Here’s a simple example:
$10,000 in credit card— 12% interest— 2% minimum payment (pretty much standard)
A– If you pay the minimum 2% of the balance (starts at $200/month, but goes down each month as the balance goes down), it will take 424 months (35 years) to pay off your debt of $10,000. You will pay over $15,000 in interest alone!
B– On the other hand, if you pay a fixed payment of $300/month, it will take you 44 months (under 4 years) to pay off your debt of $10,000. You will pay just over $3,000 in interest.
As a side note, if you take the starting minimum payment of $200 in example A, and keep that $200 as a fixed payment, you will get done in 6.5 years, which is still amazingly better than the bleak 35 years of minimum payments.
While the myth “You will never pay off your debt if you pay just the minimum monthly payment” is technically not true, it really depends on your interpretation of the word “never.” Sometimes “a long time” (like 35 years!) may as well be “never.”
If you haven’t run the numbers on your debts, play around with a credit card calculator to see the difference that paying more than the minimum payment can make. You might have to check an old statement to see what the minimum payment percentage is (or just use 2%). We can discuss details on your findings in the comments.
Are convinced that paying more than the minimum is a must? That leads us into myth number 2.
Myth #2– You can’t afford to pay more than the minimum payment.
Maybe your current budget allows only enough money for minimum payments, but that doesn’t mean you can’t afford more. Knowing that paying only the minimum due will likely cost you thousands in interest and take many years longer to pay off, you really can’t afford not to free up some money to increase your monthly payment.
Ideas to free up some money in the monthly budget to put toward debt:
- Get rid of cable
- Downgrade your phone plan (we get a refund each month for unused data)
- Cut the grocery budget (with these real food meal plans you’ll spend $350/month
- Stop eating out
- Pack your lunch
- Ask about having your bills lowered
- Dress for the weather and adjust the thermostat
- Skip the morning coffee and afternoon Coke (drink water instead)
- Sell your car and buy a used one
The list could go on and on. Get creative. Make sacrifices.
“Finding” money in your monthly budget by reducing expenses is a gift that keeps on giving. Sure, you can find something to sell on ebay and get a one-time $60, but if you pull the plug on cable you will have an extra $60 (likely more) every month.
If you still have plumbing problems (i.e. you are spending more than you make) then your debt is still growing. You will have to free up enough in the budget to cover your expenses before you can find extra to increase your monthly payment to creditors.
If you are stumped about where to start and how to reduce your expenses, check out Frugal Fresh Start: A 28-day challenge to trim your expenses, build a budget & fix your finances. You’ll find practical, effective challenges that will help you reduce your normal expenses, organized in a way that’s motivating and makes sense!
Don’t let these myths or their debunking discourage you. Knowledge is power! Let it encourage you. You can do this!
It’s Your Turn!
- Do you routinely pay more than the minimum payment on your debt?
- What ways have you been able to pay more than the minimum payment?
- Have you run the numbers on your debts to see the difference paying extra would make?
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moneycone says
December 4, 2013 at 8:18 amNice, clear explanation there! I always pay the statement balance – credit card is for convenience, not really for credit and that’s how I view it.
Credit card debt is one of the worst kinds of debt to get into.
Stephanie says
December 4, 2013 at 4:28 pmWe use credit cards for convenience as well. Our debt is in student loans, but the same principles apply (only the numbers are much bigger).
In fact, I’ll have to run the numbers to see what our minimum payment on our student loans would be and how long it would take us. We have income-based repayment and don’t owe anything yet. Of course that isn’t keeping us from paying it off as fast as we can. I think your loans are forgiven after 25 years, but we don’t want to be enslaved that long.
Amanda (Moming About) says
May 15, 2014 at 2:12 pmI’m already dreading this because I have plenty of student loan debt already and am still in school. 🙁
Stephanie says
May 15, 2014 at 8:58 pmThat’s a hard phase to be in. Just do your best to keep your expenses down while you’re still in school.
Michelle @fitisthenewpoor says
December 4, 2013 at 8:52 amWhen I wasn’t paying off debt, I would pay the minimum x 2 + interest from last month’s bill. It did make a dent on a lot of the payments.
Now I am throw everything I can at the debt in hopes to pay it off faster. I totaled the interest I was paying and would be paying and it was insane. No thank you!
Stephanie says
December 4, 2013 at 4:36 pmI have heard of people paying the minimum twice a month (once out of each paycheck).
Like you, we are throwing everything we can at our student loans. It is crazy what a difference it makes to pay it off fast. When we were setting our goal for our debt pay-off, I crunched the numbers to see how changing the monthly payment would affect the total interest and the total time and it really is incredible the difference urgency makes!
liz says
December 4, 2013 at 9:21 amWe play the balance transfer game. Sometimes it doesn’t make sense to transfer but sometimes it does. Making only the minimums until the interest rate changes and then we throw all our money at it and pay it off…or sometimes transfer it again…paying more every month would be better though
Stephanie says
December 4, 2013 at 4:40 pmBalance transfers are something I plan to talk about soon. Have you ever got burned (had a late payment or something that took away the “introductory 0% rate” and jumped it up to the standard ridiculously high rate)? I am curious to hear people’s experience with them.
Barb @ A Life in Balance says
December 5, 2013 at 7:26 amYou can also snowball payments. Roll the old payment over into the new payment on the new debt as you pay off each debt.
I found your site on the Thrifty Thursday linky at Living Well Spending Less. I’ll be back to read more of your posts.
Stephanie says
December 5, 2013 at 1:53 pmDefinitely keep your debt-fighting momentum up by snowballing! We just have one big giant debt (with currently no payments), so we’re just putting everything we can toward it, but the snowball method is great.
Grayson @ Debt Roundup says
December 5, 2013 at 9:45 amWhen I was in $50k of credit card debt, I was only paying the minimum. It would have taken me past my possible life span to pay it all off. Even if you add $10 extra a month, it makes a dent.
Stephanie says
December 5, 2013 at 1:57 pmCase in point, Grayson! You’ve got to muster up more than the minimum. Hooray for paying it off and getting your life back 🙂
Shar says
December 6, 2013 at 6:28 pmWe’re paying minimums on the few cards we have, but our goal is to have them paid off this year. Happy I found your blog to learn more and stay motivated about paying off debt. Found your blog over at the Thrifty Thursday link up at Living Well, Spending Less.
Stephanie says
December 7, 2013 at 10:36 amShar that sounds like a great goal! I’m hoping we can all help motivate each other around here 🙂
Alicia @ Financial Diffraction says
December 7, 2013 at 3:13 pmThanks so much for the explanation. I thought that something had changed since that minimum payment because (at least here in Canada) it says “if you paid the minimum payment, it would take you X months to pay it off”. They can’t easily say “you’ll be dead and have more debt than you started with”. It can be a long battle with those smaller monthly payments like $200, but it gets there eventually.
Stephanie says
December 9, 2013 at 11:04 amIt would be like the Surgeon General’s Warning on cigarettes. Do you have something like that in Canada? Here, they put a warnings on cigarettes “Smoking causes cancer” “Smoking causes birth defects” etc. “If you paid the minimum payment, you’ll be dead before you pay off this balance!”
Sarah Mueller says
January 28, 2014 at 4:34 amWe were blessed to pay off my student loans early in our marriage and we now have just a 15 year mortgage. That number seems menacingly large, but we are contributing extra each month to the principal. I’m really looking forward to paying that one off completely!
Thanks for your thorough analysis. I didn’t realize the minimum payment on a credit card would go down as the balance decreases. It seems like the credit card companies really want to milk those debts for all they’re worth!
Stephanie says
January 29, 2014 at 8:41 amThat’s wonderful Sarah! That will be so exciting to be done with your mortgage!
We have always paid our credit cards in full, so I didn’t realize it either. The more I learned about credit cards, the more frustrating it was. They seem to really want to keep people in debt.
adrian says
May 3, 2014 at 6:35 pmI did a post on just this topic a while back. My secret is that I pay the minimum payment, but I do it twice a month rather than once a month. So if my minimum payment on a credit card is $40 – I pay that on my first pay period and then again on my second. The logic to this is that I’m paying the debt off twice as fast and I’m avoiding any possibility of a late payment because I’m sending them money every two weeks. Of course, it would be smarter if I didn’t have any credit card debt at all, and I’m snowballing my way into that place, but in the meantime, this keeps my non-snowball accounts chugging along. #SITSSharefest
Stephanie says
May 5, 2014 at 8:34 pmThat sounds like a good plan Adrian! That will get those credit cards paid off much faster than just the minimum! Keep up the good work!
Sarah says
May 6, 2014 at 9:33 amI LOVE this blog and I have oly read two inserts so far. I have two credit cards with intrest rates at 22%!!!! I had been paying just the minimum balance but have recently cut our internet out completely and cut down our television which freed up a little over $100 monthly. I now split that between the two cards and have dramatically cut down my End of Debt Date! Yeah for debt-free!!!
Stephanie says
May 6, 2014 at 9:36 amThanks Sarah! That is a painful interest rate!! Good for you for finding a way to free up some money! Your sacrifice will pay off. Keep up the good work! 🙂
Dissident says
June 14, 2014 at 6:02 amBoth of these “myths” are true in my case. My debt only goes up, even if I pay double the minimum payment, and I have no extra things to go without (unless you think I can survive without water).
vishal says
August 31, 2014 at 5:07 amcredit cards and minimum payment option has ruined thousands of Indian families because of these unknown facts to the Indian public in the beginning. Even now a lakhs of families are suffering because of this formula.
Stephanie says
September 3, 2014 at 11:32 amIt is sad how many people get into trouble because they didn’t understand that paying the minimum on your credit card bill will end up costing you so much!